Many biotech stocks have taken a beating over the last 12 months. That's the bad news. But the good news is that major pullbacks in an industry can present great buying opportunities for investors with an eye on the future.
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I believe that's the case in today's market. There are several biotech stocks with solid revenue and earnings that are trading at a steep discount to what I think they should be worth. Here are three incredible biotech bargains you should consider.
1. Jazz Pharmaceuticals
Jazz Pharmaceuticals came ever-so-close last year to claiming its first blockbuster drug. Narcolepsy drug Xyrem generated revenue in 2015 of $955 million. The drug should top the $1 billion sales mark this year.
A handful of other drugs kicked in more revenue for Jazz last year. Acute lymphoblastic leukemia (ALL)chemotherapy Erwinaze/Erwinase led the way with $203 million in sales for 2015. Thanks largely to Xyrem and Erwinaze/Erwinase, Jazz reported earnings of over $329 million, or $5.23 per share, last year.
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But with a trailing-12-month price-to-earnings ratio of nearly 29, is Jazz's stock really cheap right now? It is when you look at the company's projected growth. Jazz expects 2016 earnings between $418 million and $458 million. That's a year-over-year increase of 33% using the midpoint of the range.
Jazz should see continued strong sales growth for Xyrem, but the big new story in 2016 will be Defitelio. The drug, which treatsadult and pediatric patients with hepatic veno-occlusive disease (VOD), won FDA approval on March 30.
The pipeline also looks solid. Enrollment should wrap up for a phase 3 study of Xyrem in treating pediatric narcolepsy later this year. Jazz also has a couple of other narcolepsy drugs in development. JZP-110 is in a phase 3 study that should be completed by the end of 2016, while JZP-386 finished a phase 1 study last year. Defitelio is also in another phase 3 clinical trial for prevention of VOD in high-risk patients who have undergone hematopoietic stem-cell transplantation (HSCT).
Jazz isn't afraid to strike deals to grow, either. The biotech just announced plans to acquireCelator Pharmaceuticals for $1.5 billion. A phase 3 study of Celator's lead drug, Vyxeos, targeting treatment of secondary acute myeloid leukemia (AML) completed successfully. Celator now plans to pursue regulatory approval in the U.S. and Europe.
Analysts project that Vyxeos could reach peak annual revenue between $300 million and $500 million if approved for treating secondary AML. Vyxeos is also part of five phase 2 studies for other indications. Should the drug ultimately win approval for all indications, worldwide peak sales could top $1 billion.
2. Ligand Pharmaceuticals
Ligand Pharmaceuticals is one biotech that has bucked the trend and posted nice gains recently. The stock is up 39% over the last 12 months.
A couple of out-licensed products, Promacta and Kyprolis, generated the lion's share of Ligand's $38.2 million in royalty revenue for 2016. Sales of the company's Captisol technology, which helps improve solubility and bioavailability in drugs, kicked in another $27.7 million. With all revenue sources included, Ligand made $71.9 million in revenue for 2015.
Ligand's trailing earnings multiple of 10 looks very attractive at first glance. However, looks can be deceiving. While the biotech reported earnings of $257.3 million last year, much of that stemmed from a one-time income tax benefit of $219.6 million.
That doesn't mean Ligand isn't still attractively valued for investors with a long-term horizon, though. Wall Street analysts project the company to grow earnings at an annual rate of nearly 46% over the next five years. Is that forecast overly optimistic? I don't think so.
Four drugs that use Ligand's technology are currently awaiting regulatory approval. Another eight are in late-stage clinical studies. Add to that 21 more in phase 2 testing. While these are all drugs being developed by Ligand's partners, they represent significant revenue opportunities for the biotech in the coming months and years.
Ligand itself expects tremendous growth in 2016 and 2017 as more partners gain approval for drugs that use its technology. The company's acquisitions and deals, including the the licensing of OmniAb from Swiss biotech ABBA Therapeutics AGforgeneration of novel antibody therapeutics, should continue to bolster growth.
3. Celgene Corporation
Celgene shows that a biotech can be both big and attractively priced. The company pulled in revenue of $9.2 billion last year with earnings of $1.6 billion. Celgene might seem pricey based on its trailing earnings multiple of 51, but the big biotech's growth potential makes this stock a value. The stock's forward earnings multiple of 15 and price/earnings-to-growth (PEG) ratio of 0.85 illustrate that growth-oriented value proposition.
The largest driver of growth in the past for Celgene will keep on helping the company grow. Blood cancer drug Revlimid generated 63% of total revenue in 2015. While that percentage is likely to decline as more drugs make their mark, Revlimid's sales should keep climbing as the drug wins approval for more indications.
Two other drugs are poised to become Celgene's next blockbusters. Cancer drug Abraxane made $967.5 million worldwide last year. Multiple myeloma drug Pomalyst/Imnovid raked in $983.3 million. Both drugs should easily eclipse $1 billion in sales during 2016.
Celgene's fastest-growing drug, though, is Otezla. The drug, which is used to treat plaque psoriasis and psoriatic arthritis, generated revenue of $471.7 million in 2015, its first full year on the market. Otezla could reach peak annual sales of over $2 billion.
Probably the crown jewel of Celgene's pipeline is multiple sclerosis drug Ozanimod. Celgene gained the drug with its acquisition last year of Receptos. Ozanimod is projected to reach peak annual sales between $4 billion and $6 billion. The rest of the pipeline looks great as well. Celgene has multiple studies in progress for additional indications of several of its drugs already on the market, plus new drugs in development.
As icing on the cake, Celgene sits on a cash stockpile of $5.7 billion. The company continues to use that money to buy back shares and make strategic acquisitions, both of which should benefit shareholders.
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